Liquid assets

'Water banks' help cities weather drought

With $250 billion in taxpayer money headed their way to remedy their phenomenal incompetence, banks aren't exactly paragons of public confidence right now. But in California, where two years of severe drought have emptied reservoirs and created a water crisis almost as scary as the financial one, a slightly unusual type of bank just might save the state's bacon.

We're not talking subprime-loan slinging outfits like Washington Mutual, or free-toaster-offering First Hometown banks. In this case, California's Department of Water Resources is hastily building a state-run "drought water bank." By this spring, if all goes according to plan, there will be a pool of water available into which the state's drought-hammered cities can dip.

In normal times, "there may be one large municipality that knows it needs water, and sends its people out looking for water rights," says Larry MacDonnell, a Colorado attorney who has studied the evolution of water banks. But during a drought, many different water users need to buy water, "and it's basically a free-for-all," he says.

With the bank, however, the state can negotiate with individual irrigation districts to buy farmers' water supplies for the year, "bundle" them together, and then resell that water to needy cities — or to other farmers who grow high-value crops and are short of water. "The bank helps organize the buyers and sellers, and creates the rules of the game," MacDonnell says.

In California, irrigation districts that receive water from the State Water Project or the federally run Central Valley Project — which together supply water to nearly 4 million acres in the state's Central Valley — can sell up to 20 percent of their water to the bank. The bank would then use both projects' canals to route that water to buyers. Rather than permanently selling their water rights, participating districts would essentially lease water to the bank and its customers for the year.

The Metropolitan Water District of Southern California, which serves 18 million people in Los Angeles and San Diego, has negotiated several water-transfer deals with individual irrigation districts in recent years. But the water bank offers a far more attractive option than beating a path to the front door of every one of the state's 1,200-some irrigation districts.

"We pursued a lot of water last year, but we didn't get an awful lot," says Steve Hirsch, Metropolitan's water-transfer manager. "I just felt there was a greater likelihood of us getting more water through a bank rather than going out on our own."

Water banks aren't a particularly new idea. Farmers along Idaho's Snake River established the first water bank in the 1930s, as a way to share unused water. "It operated for a number of years informally outside of the regular legal water-law system," says Clay Landry, the managing director of a consulting company called WestWater Research. "The local community got together and came up with this concept, and it was such a good idea that the Legislature finally authorized it 40 years later."

Since then, water banks have bloomed in semi-riotous profusion, and produced many different hybrids. Water banks have been launched in at least eight of the 11 Western states, but not all of them have been successful.

"People at the local level will find what's comfortable for them," MacDonnell says. "If they are comfortable, it's going to work. Otherwise, you're going to create institutional rules nobody's going to use."

That happened on the Arkansas River in Colorado. In 2001, the state Legislature created a water bank — but saddled it with so many restrictions that, after seven years, it has yet to complete a single transaction. Only two water users offered to sell their water through the bank, and the asking price was so high that "it was just prohibitive, unless you were going to grow some kind of illegal crop," says Bob Hamilton with the Southeastern Colorado Water Conservancy District.

Bank customers in California may themselves face high prices next year. Much of the water for the bank would likely come from rice farmers in Northern California's Sacramento Valley. But rice prices have essentially doubled each of the past two years, and farmers may prefer planting to take advantage of boom prices rather than selling their water to a bank.

Thad Bettner is the manager of the Glenn-Colusa Irrigation District, which has participated in several water transfers in the past. "Right now, the district's maxed out," he says. "It's pretty much planted wall-to-wall. And if anything, the price (of rice) next year is probably going to be even higher."

Regardless of how water prices finally shake out, the water bank also provides a twist on an old antagonism in the state. Some California agricultural communities still harbor a lingering stigma about selling water to big cities. The water bank could provide cover for farmers who'd like to sell some of their water, but can't stomach the idea of selling it to Los Angeles. As one longtime observer of the state's water deal-making says, "It's a lot easier to show up at the local coffee shop and say, ‘I'm not sure who my water's going to, but I'm selling it to this bank.' "

This article was made possible with support from the William C. Kenney Watershed Protection Foundation and the Jay Kenney Foundation.